Sunday, October 3, 2010

Now that gold is muscling its way towards $2,000 an ounce, the forces of ignorance embodied by post-secondary-accredited yet nonetheless clueless commentators are being given voice by government sponsored media outlets such as CNN. Tokyo Rose was the generic handle accorded to any of a dozen women who, during World War 2 broadcast programming designed to undermine the morale of American troops over the radio.

Coverage such as stories like today's "The Case Against Gold" on CNN Money are designed to undermine the determination of gold accumulators who are genuinely frightened about the purchasing power of their dollars as their government 'quantitatively eases' the economy back onto its feet. By continuously counterfeiting fiat currencies and flooding the markets with such ersatz lucre, the final rush towards economic collapse is momentarily cushioned.

But make no mistake. The acceleration of the rate at which gold increases - the average has been $87 per year since 2000, and in the last 365 days from today, that number is $317 - is an analogous signal that the rate of deterioration of the global economic system as a whole is itself accelerating proportionately. Contrary to the misguided tone in the CNN article suggesting now is not the time to get into gold, the correct sentiment should be that now is the time to put ALL of your liquid, dollar -denominated wealth into gold. All of it.

Here's what is going to happen next:

We've reached the brink where the next phase is hyper-inflation. This is where money can't be printed fast enough to keep up with its devaluation. Governments will stop accepting, first and foremost, U.S. dollars for the settlement of international trade, and will look to its own currencies. This will have the effect of paralyzing the global flow of commodities and commodity derived industry, which will further paralyze national economies, which will respond by printing yet more money, which will cause another devaluation in purchasing power, in this end-game spiral to the bottom of this hole we've dug.

The first casualty of the collapse of the economic system will be civil order. Crimes against property will skyrocket roughly proportionate to the rate of currency devaluation as families find themselves cornered by lack of goods on the shelves in markets, and there is no choice but to steal from whomsoever is weaker.

Finally governments desperate to restore order and re-establish a new global economy to facilitate the flow of goods again will sit down and negotiate the establishment of a new form of global currency that will essentially tie the amount of money one can print to the value of a country's GDP, which at the end of the day, is the only realistic way to mark a currency's value accurately. Gold at this point, will be re-embraced as the defacto standard by which currencies are valued, and should be able to hang onto that role as long as history is accurately recorded and taught.

This will bring about an end to the meteoric rise of gold, and should see its price flatten out, if this scenario unfolds.

As to the exact dates of this scenario, it is impossible to predict, because the variables that will force the final capitulation economically are unknown, such as how much money will be issued before the diminishment in purchasing power surpasses the rate at which money is created, and when exactly any given food producing country will stop accepting currency from its trading partners.

In this scenario, less developed and less populated countries that are agriculturally self-sufficient will fare much better than over-populated, over-industrialized agriculturally import-dependent nations.

Countries like Peru, Argentina, Vietnam will continue to eat. Europe, China and most fittingly, the United States, will suffer most.

The current war of words between China and the United States over currency, and Japan's present requirement to sell its own currency to push down the yen's value, are also indicators of a broadening monetary crisis. Here's Tiny Tim Geithner and Barack Obama, neither of whom have a native macro-economic brain cell that functions properly, issuing threats to China about unfairly propping up the value of its currency while apparently ignorant about Japan's violation of the free trade mantra supporting free-floating currency exchange rates.

Its truly astonishing that the hypocrisy of such policy remains under-reported in the mainstream financially media - clear evidence of the Tokyo Rose type of role that top tier financial programming has been roped into.

China holds all the cards here. If they decide the United States needs to be taught a lesson, it will just sell off some of its vast holding of treasuries and force the United States into hyperinflation. The final days of the U.S. hegemonic empire are at last coming to a close, and the world, including clear-minded Americans, should sigh in relief when that day finally comes. Then we can get to work, as a unified world, to build a more realistic and equitable global economy.

Protesters took to the streets of Reykjavik today, forcing MPs to run away from the people they represent as renewed anger about the impact of the financial crisis erupted in Iceland.

The violent protest came amid growing fury at austerity measures being imposed across Europe. Disruption in more than a dozen countries this week included a national strike in Spain and a cement truck driven into the Irish parliament's gates.

Witnesses said up to 2,000 people caused chaos at the state opening of the Icelandic parliament, with politicians forced to race to the back door of the building because of the large number of protesters at the front. Eggs were said to have hit the prime minister, Jóhanna Sigurðardóttir, other MPs and the wife of the Icelandic president, Ólafur Ragnar Grímsson.

Árni Páll Árnason, the minister of economics affairs, who was caught up in the protests, said: "We have a difficult economic situation and this is something to be expected in a democratic country."

Juan Somavía, director general of the ILO, said social cohesion would be at risk, adding: "Governments should not have to choose between the demands of financial markets and the needs of their citizens."

The protests came in the same week as demonstrations in Greece, Portugal, Slovenia and Lithuania.

According to the writer Hallgrímur Helgason, anger has flared in Iceland because of the increasing numbers losing their homes and fury that only the former prime minister Geir Haarde has been charged with negligence over the financial crisis. The parliament voted this week to charge Haarde, who has said he is confident he will be vindicated, but not three others facing similar charges.

Birgitta Jónsdóttir, one of three MPs to join the protesters, said: "There is a realisation that the IMF is going to wipe out our middle classes."

Árnason said that while the economy was still difficult, the government was convinced it was taking the correct measures to put the county on track for a balanced budget by 2012. "We expect 3.2% growth next year and we believe unemployment has peaked at 8.3%," he said.

Joseph Stiglitz, one of the world's leading economists, has warned that the future of the euro is "looking bleak" and the fragile European economic recovery could be irreparably damaged by a "wave of austerity" sweeping the continent.

The former chief economist of the World Bank and a Nobel prize winner also predicted that short-term speculators in the market could soon start putting pressure on Spain, which is struggling with a large deficit and high unemployment. Last week, Moody's cut the country's credit rating from AAA to Aa1.

The former adviser to President Bill Clinton also says that the banking sector has gone back to "business as usual" too quickly and that there are still risks of another financial crisis despite some improvements in regulation.

Mr Stiglitz, now a professor at Columbia Business School, makes the arguments in an updated edition of his book, Freefall, on the credit crunch. In the new material, exclusively extracted in today's Sunday Telegraph, he reveals fears that governments around the world will attempt to cut their deficits too quickly and risk a double dip recession.

Tomorrow, George Osborne will outline the Government's latest plans for multi-billion pound public sector cuts to tackle the historically-high UK deficit. He has faced criticism that the Coalition is in danger of cutting too hard and too fast but the Chancellor has said that without a credible programme for getting the UK economy into balance, interest rates will rise and growth will be choked off.

"The worry is that there is a wave of austerity building throughout Europe and even hitting America's shores," Mr Stiglitz said. "As so many countries cut back on spending prematurely, global aggregate demand will be lowered and growth will slow – even perhaps leading to a double-dip recession.

"America may have caused the global recession but Europe is now responding in kind."

Mr Stiglitz warned that Spain, similarly to Greece, was now in the speculators' sights.

"Under the rules of the game, Spain must now cut its spending, which will almost surely increase its unemployment rate still further," he said. "As its economy slows, the improvement in its fiscal position may be minimal.Spain may be entering the kind of death spiral that afflicted Argentina just a decade ago. It was only when Argentina broke its currency peg with the dollar that it started to grow and its deficit came down.

"At present, Spain has not been attacked by speculators, but it may be only a matter of time."

Turning to the euro, Mr Stiglitz said that the different needs of countries with high trade surpluses, particularly Germany, and those running deficits such as Ireland, Portugal and Greece, meant that the single currency was under intense pressure and may not survive. He suggests that one way to save the euro would be for Germany to leave the eurozone, so allowing the currency to devalue and help struggling countries with exports.

"Countries that share a currency have a fixed exchange rate with each other and thereby give up an important tool of adjustment," he said. "So long as there were no shocks, the euro would do fine. The test would come when one or more of the countries faced a downturn."

You may be asking yourself, did the central banks ever control the gold market?Yes, indeed they did!The gold Standard was the ultimate system of control they had until it was dropped.Then President Roosevelt’s Administration took control of the U.S. gold market when he confiscated all U.S. citizens held gold.Ownership of gold was only re-permitted in the early seventies.Even then the ‘powers that be’ declared that gold ownership was a privilege, not a right.That still holds.Few really appreciate the extent of central bank control over the gold market and gold price.We believe it is a critical aspect of the gold market and gold price, without which one cannot really understand the gold market.

A brief history of Central Bank control of gold

When Eurodollars appeared in Europe, European central banks were not happy and sold them for U.S. gold.Then President Nixon, in his infinite wisdom closed the ‘gold window’ [After Europe had boosted their reserves after sending around 12,000 tonnes of gold across the Atlantic into European vaults].In a mutually beneficial but clandestine accord, the world then saw the U.S. dollar rise to be the sole global reserve currency.It has continued to reign supreme because it is the only currency that is used to buy oil, oil that we all need.

Control lost

After 1971, gold began to rise in earnest as every man and his dog bought some, taking the gold price from $42.35 to $850.This was a public statement that the global investing public did not accept paper currencies with no gold to back them.These had become simply government obligations with no settlement date.

Central banks had to act to ensure the public accepted these currencies and were moved away from gold as money.To do that, the U.S. and by extension the I.M.F. decided on limited [limited because central banks still wanted it in their vaults as an important reserve asset] gold sales through auctions.All the gold sold there was snapped up.The reality of central banks wanting to keep gold then kicked in and the auctions were halted.

Control regained

Another tactic was then used.This time the central banks, lent gold to gold miners who used it to finance gold production.This caused a huge acceleration in the tonnage of gold coming to the market, too much for the market to absorb.The gold price fell right back to its 1999 low of $275.But the central banks technically still owned the gold as producers repaid their loans with gold from their mines.

At the same timed central banks supplied a well orchestrated campaign that implied central banks may well sell all the gold they owned over time.Markets and analyst swallowed the bait.The job of ensuring the U.S. dollar was the only solid, global reserve currency was then achieved without the interference of gold.

Then the time came for the Euro to enter the market in place of the European currencies, such as the French Franc, the Deutschmark, and the Italian Lira, etc.With the task made easier by the anti-gold campaign that ensured the acceptance of the U.S. dollar, the Euro was quickly established as the world’s number two currency.Nevertheless, the fear remained that Europeans would prefer gold, so the European central bankers made, to date, three agreements to sell a limited amount of gold over the next fifteen years [four years still to go].Unexpectedly this removed the fear that central banks were selling the gold price down still.

The gold price turned around, miners over time bought back all their hedged positions [matching central banks sales in the process] and last year both the miners and the central banks let their sales and de-hedging dwindle to almost nothing [AngloGold Ashanti will still buy 131 tonnes of gold to close its hedge book].

Until last year [2009] there is no doubt that the gold market reacted to central bank policy on gold and moved the price accordingly.Let’s face it if they did really get rid of over 30,000 tonnes of gold the gold price would collapse.Central banks knew full well the implications of fears that they may sell gold.It would effectively ensure that hardly any investment in gold took place.This was control too!

Have Central Bank lost control again?

Close to the beginning of 2009 the European central banks let their gold sales dwindle.It became clear to all that there was no more appetite in the signatories to sell gold.The Euro was then fully accepted by all.Central bankers re-established the importance of gold by the cessation of gold sales.But European central bankers had made this clear in the first central bank gold agreement, called the ‘Washington Agreement’, which made it clear that all the signatories regarded gold as an ‘important reserve asset’.Consequently, they have been happy to see the gold price rise too.As Axel Weber, the head of the German Bundesbank said in the past, ‘gold is a useful counter to the swings in the dollar’.

By then the “credit crunch” had endangered the banking sector and spread into the Sovereign Debt crisis.The currency world did not seem so solid and gold was holding its highs and looked like rising even more.The attraction of gold to central bankers re-confirmed itself in such a climate.

Why is gold an important reserve asset?In times of international financial stress, gold will settle international financial obligations, when government promises won’t.We have now entered the time when financial stress underlies the entire global monetary system.Right now we are at the door of potentially major, global currency strife.This means that central bankers are no longer in a mood to sell their ‘rainy day’ gold.

But they don’t control the supply of gold anymore.Their control since 1985 only went as far as to undermine the gold price.They have placed themselves in a position where they can’t even buy gold for their reserves.To do so may imply that they have accepted that they too are losing faith in paper currencies.That must never happen.So they sit with a firm grip on the 30,000 tonnes they now have, but have lost control over the gold price.That went the moment they stopped selling.

Control dispersed

As the rest of the world emerges and drains wealth and power from the West taking their foreign exchange reserves to unimagined heights, they now see the need to diversify away from the near total dependence they have on developed world currencies.They have so little gold in their reserves that in their citizen’s savings that they have embarked on a campaign to build up Chinese gold holding.India has already done that and topped up their reserves with 200 tonnes from the I.M.F.China in particular has a very long way to go before their gold reserves are adequate for reserve asset requirements.

Russia was the first to announce the intention to increase the gold component of their reserves.Mr. Putin then announced Russia’s intention to accumulate 10% of all its reserves in gold.It has taken a long time to even get part of the way there [see the Table Below].

China has made no announcement that it intends to achieve any particular level but is acquiring locally produced gold into an agency that, in time, will pass it to the People’s Bank of China and only then will an announcement be made as to what they have bought.This appears reasonable for if China were to announce any target level it would put a rocket beneath the gold price, so, in true inscrutable style they have simply announced increases in gold reserves well after the event.We do believe they are buying gold internationally too.Retail demand in China is way over local production levels [we guess-estimate, around 150 to 200 tonnes is being imported if not more, as the number of importers has been widely extended.We also know that China began buying gold around 2004 if not before then.

In addition, since last year, the number of central banks that have been buying gold has increased steadily.From the Middle East eastwards central bankers have come to the gold market.This new tide of demand is unlikely to subside for a decade if not far longer.Eastern demand is in the hands of half of the world’s population and the half that has always loved and respected gold as money.

Central Bank Control lost!

The developed world central banks were able to control the gold market in the days of the gold standard, because they acted in unison and legislated that control nationally [and by extension, internationally].They nearly lost it when Europe was buying it from the U.S. until President Nixon closed the ‘gold window’.Then they lost control of the gold market after 1971 until around 1985.Control was then re-imposed by assisting in accelerating production and discouraging demand until 1999.Thereafter, central bankers had limited control through limited sales, which allowed for a steady rise in the gold price, right through to 2009 [$1,200].

The major breakdown of central bank control over the gold market and the gold price came when emerging markets came to the gold markets to buy gold.‘Eastern’ central banks are unlikely to cooperate in holding the gold price down because they need gold in their reserves.Central bankers of the world [developed and emerging nations] have vastly different interests. These are unlikely to meet in any accord over gold.Now, with faith in developed world currencies on the wane, gold is becoming a vital [not just important] reserve asset.The skill will be in acquiring sufficient volumes of gold, without skyrocketing the gold price.

Global central bankers are divided on gold, with some buying, others holding but almost no central bank selling.Without unity of intent, central bankers cannot control the gold market or its price, any longer.They are almost in competition with each other.Non-central bank investors are jostling central bank buyers for any available gold.

Central bankers have now lost control of the gold market.Can they get it back?

Gold extended its record-breaking rally to a sixth straight day on Friday, rising near 1 per cent as comments from Federal Reserve officials and US data reinforced expectations of further monetary easing.

The US dollar fell to a six-month low versus the euro after New York Fed President William Dudley said more Fed action to boost growth will likely be needed if the economic outlook doesn't improve. Data showing US manufacturing growth slowed and inflation remained subdued in August aided the case for more monetary policy easing.

The rally carried over to the other more volatile precious metals that outpaced gold's gains, with silver rising nearly 2 per cent to its highest since 1980 and platinum to a four-month peak.

Spot gold scaled an all-time high of $US1320.80 an ounce and was up 0.8 per cent $US1316.35 an ounce in late New York trade. US gold futures for December delivery settled up $US8.20 at $US1317.80.

Bullion was 1.5 per cent higher for the week, posting its biggest three-week rally since mid-May.

Gold rose 6 per cent in the third quarter, its eighth consecutive quarterly gain, with dealers saying the two-year rally looked resilient on the growing belief that the Fed will decide next month to pump billions of dollars into the economy through buying government debt, or quantitative easing.

"What you are seeing is anticipation of the Fed coming down with another round of quantitative easing. The question at this point is what's the size of it. I would look at November, December for the next phase of monetizing all the debt that we put out there," said Zachary Oxman, managing director at TrendMax Futures.

The US dollar plunged to a eight-month low against a basket of major currencies after two Fed policymakers said that more action would likely be needed unless the outlook improves in the clearest calls yet by Fed officials to pump more cash into the economy.

US data also showed both consumer and construction spending rose more than expected in August, but investment in private projects fell to its lowest level in more than 12 years.

With analysts expecting the US dollar to extend losses to the end of the year, gold is expected to benefit from demand as an alternative currency.

The prospect prompted investors to buy bullion as a hedge against the possibility of a double-dip recession or inflation.

Gold looks poised to test above $US1500 an ounce over the next three months, supported by bullish wave pattern and a Fibonacci projection analysis, a Reuters technical analyst said.

Holdings of the world's largest gold-backed exchange-traded fund, New York's SPDR Gold Trust, dipped however by just under 1 tonne to 1304.776 tonnes.

Silver hit a 30-year high at $US22.15 and was trading up 1.6 per cent at $US22.04 an ounce. The metal has outperformed gold this year, rising 30 per cent against gold's 20 per cent climb.

The gold-to-silver ratio, which shows how much silver an ounce of gold can buy, slipped below 60, its weakest level since January.

However, UBS analyst Edel Tully said in a note that silver may be more vulnerable to a near-term correction than gold.

‘‘Much of silver's move having been technically driven...A pullback would be particularly unsurprising because silver is notoriously volatile, its price regression typically being a lot more violent than gold's."

Gold's strength lifted platinum to a 4-1/2 month peak at $US1684.50. It rose 1.4 per cent to $US1674.50 an ounce, while palladium gained 0.6 per cent to $US567.50.

By my analysis, we are not yet on the final path to recovery, and there are one or more financial 'breaks' coming in the future. Underlying structural weaknesses have not been resolved, and the kick-the-can-down-the-road plan is going to encounter a hard wall in the not-too-distant future. When the next moment of discontinuity finally arrives, events will unfold much more rapidly than most people expect.

My work centers on figuring out which macro trends are in play and then helping people to adjust accordingly. Based on trends in fiscal and monetary policy, I began advising accumulation of gold and silver in 2003 and 2004. I shorted homebuilder stocks beginning in 2006 and ending in 2008. These were not ‘great' calls; they were simply spotting trends in play, one beginning and one certain to end, and then taking appropriate actions based on those trends.

We happen to live in a non-linear world; a core concept of the Crash Course. But far too many people expect events to unfold in a more or less orderly manner, with plenty of time to adjust along the way. In other words, linearly. The world does not always cooperate, and my concern rests on the observation that we still face the convergence of multiple trends, each of which alone has the power to permanently transform our economic landscape and standards of living.

Three such trends (out of the many I track) that will shape our immediate future are:

Peak Oil

Sovereign insolvency

Currency debasement

Individually, these worry me quite a bit; collectively, they have my full attention........read on

US Inflation Rate

Disclaimer

Comments made on this website are an expression of opinion only. Whilst I try to explain the possible benefits of investing in precious metals, you should not construe comments, links or advertisements on this website as recommendations to buy or sell a commodity at any time. I recommend you consult with your qualified investment advisor, before you make investment decisions. Please be aware that authors of material on this website may have invested, or may from time to time invest, in commodities discussed on this website.